Renold plc (RNO) Earnings Call Transcript & Summary

Well, the attendee list seems to have slowed down, so we'll kick things off. Good afternoon, and welcome to the Renold investor webinar. This is on the half year results that were announced earlier this morning. With me, I've got Robert Purcell, CEO; and Jim Haughey who's CFO. Robert and Jim are going to run you through the presentation that they've been giving to various audiences during the course of today. And then after the presentation, we'll have the opportunity for a question-and-answer session. Given the number of people who are online today, unfortunately, it's not possible to go to you individually, ask you to unmute and put your questions directly to the team. But we do encourage further questions. [Operator Instructions] I'm also grateful to those who provided questions ahead of the presentation, very useful, and I'll be also putting those to the team afterwards. So without further ado, I will hand over to Robert to start the presentation. Robert?

Thank you very much, Tim. Good afternoon, everyone. Welcome to the presentation of the Renold results for the first half of our financial year ending the 31st of March 2024. We have the first page up, so I'll kick it straight off. We have produced robust results in the first half of the year with a continuation of the momentum from the second half of last year. The economic environment is not an easy one. The impact from COVID has reduced, but the Ukraine war, higher interest rates and continued geopolitical tensions are all having an effect. However, the period's performance was very strong. Revenue was up 7.7%, 10.7% at constant exchange rates driven by volume and price. Cost inflation has been passed through 100%, demonstrating the strength of Renold's product and service proposition. Adjusted operating profit was up 56.3% to GBP 15 million. And as we execute the Renold STEP2 strategic plan, we have driven the return on sales up 370 basis points to 12%. Adjusted EPS growth was 40.7%, taking us to 3.8p. Net debt reduced by GBP 1.5 million to GBP 28.3 million. I will leave Jim to explain the details of this in his section, but the net debt reduction was despite us incurring considerable acquisition and pension cash costs in H1. The underlying cash performance was particularly strong. The pension deficit across all our schemes reduced 15.3% to GBP 52.7 million. As global supply chains normalized and customers became more confident about lead times, our order book has shortened. Order intake in H1 was GBP 109.7 million. However, the group order book remains above historic levels. We announced a few weeks ago the acquisition of Davidson Chain in Australia for AUD 6 million. This family-owned business, currently based about 45 minutes' drive from our Melbourne factory, is a manufacturer and distributor of conveyor and adapted transmission chain and strengthens our presence in the Australian market. Similarly to past acquisitions, this lets us bulk up our position in a geographic market, creates cross-selling opportunities and enables cost synergies. It is earning-enhancing from day 1. The STEP2 strategy is moving forward in all these aspects, but we've made particularly good progress in the period on a number of key projects, which have delivered excellent results, helping us offset inflation whilst also expanding the benefits of our international manufacturing footprint. In the period, there was an exceptional profit from the disposal of the lease on the legacy Bredbury factory, but most importantly, this leads to a $0.7 million reduction in cash lease costs per annum. So that's a quick summary. Over to Jim to go through the numbers in a bit more detail.

Okay. So moving on to the financial summary slide. Turnover is up GBP 9 million or 7.7% as the group benefited from a strong opening order book. At constant exchange rates, this is an increase of 10.7%. Adjusted operating profit increased strongly to GBP 15 million. That's a 12% ROS. This represents an increase of 56.3% year-on-year or 59.4% at constant exchange rates. ROS rose by 370 basis points from 8.3% reported last financial year to 12% seen this year. Adjusting items consists of GBP 2.2 million of additional profit from the assignment of the remaining lease on the closed Bredbury site to a third-party, GBP 0.5 million of acquisition and reorganization costs relating to the Davidson acquisition in Australia and GBP 0.5 million of amortization of acquired intangibles. Adjusted EBITDA increased by 37.3% to GBP 20.6 million for the half year. Net debt, as Robert mentioned earlier, reduced by GBP 1.5 million from the prior year-end despite the fact that the group spent GBP 3.1 million on the acquisition of Davidson Chain in Australia, made the initial deferred consideration payment for the YUK acquisition and also brought forward from H2 the cash contributions to the U.K. pension scheme in order to enable efficiency gains in the scheme's investment portfolio. Net debt gearing, i.e., net debt to EBITDA, stood at 0.7x, a reduction from 1.2x seen in the last half year as the group invested in our Spanish business. The group has sufficient headroom to execute on an identified pipeline of further bolt-on acquisition opportunities. Adjusted EPS at 3.8p increased by 40.7% compared to the prior year. The above numbers again illustrate the results of the strategy over the past few years, which has delivered a more flexible business with a lower cost base. Moving on to the divisional slide, focusing in on the divisions. The Chain division's turnover increased by GBP 3.8 million or 4% to GBP 98.9 million. This represents a constant currency increase of 6.7%. Adjusted operating profit increased by 26.4% to GBP 15.8 million or 28% at constant exchange rates. Return on sales increased by 290 basis points to 16%. Both recent acquisitions, that's Davidson this financial year and the YUK acquisition from last year are performing well. As mentioned earlier, this year's statutory operating profit is flattered by GBP 2.2 million from the assignment of the remaining lease on the closed Bredbury side to a third-party, GBP 0.5 million of acquisition and reorganization costs related to the Davidson acquisition in Australia and GBP 0.5 million of amortization of acquired intangibles. In the later-cycle TT division, revenue increased by 25.2% or 29.6% at constant exchange rates as we saw an increase in activity in both the North American market and the impact of recent military orders on the Couplings business in Cardiff. Operating profit increased by GBP 3.1 million or 207% due in the main to the volume increases mentioned above and a positive change in the mix of the business. The business also continued to incur legal costs associated with the negotiation of further large military contracts, which we should see later on this year. Head office cost increased due to the impact of inflation and an increase in provision for variable elements of pay. The next slide is our profit bridge slide, and that shows hopefully how we achieve that increase. First of all, you can see retranslation of results from foreign subsidiaries reduced operating profit by circa GBP 0.4 million. The impact of price, volume and mix added a total of GBP 3.7 million to operating profit of this sales price increases, in the half year averaged 5.2% and are estimated to drop through to profit following inflationary cost increases and approximately an EBITDA margin of 17%, that's circa about GBP 1 million. Efficiency and productivity improvements, especially related to buying productivity and standardization of products, components and processes, increased operating profit in the period by circa GBP 1.9 million. The YUK and Davidson acquisitions together added GBP 1.1 million to operating profit. Other costs, which include the impact of variable elements of pay and movement in inventory provisions were both headwinds at circa GBP 0.9 million. Finally, the half year results showed an operating profit of GBP 15 million with a return on sales of 12%. The next slide shows our cash flow. Adjusted EBITDA was strong in the period, increasing to GBP 20.6 million from GBP 15 million seen last financial year, an increase of 37.3%. Working capital increased by roughly GBP 1.5 million, broadly in line with activity. Net CapEx at GBP 2.1 million is traditionally slower in the first half of the year and will pick up to around GBP 8.5 million for the full year. Strategic investments in production machinery and IT systems will gather pace during the second half of the year. Pension cash costs increased in the year as the group commenced payment of the additional GBP 1 million of cash contributions agreed with the scheme, following operating profit exceeding GBP 16 million. While contributions for the repayment of the COVID pension payment holiday continue at GBP 0.6 million per annum. In addition, the group took the opportunity to bring forward GBP 2.6 million of cash contributions to the U.K. scheme to allow the scheme to benefit from certain investment efficiencies. U.K. cash contributions under the CAR increased by RPI inflation but are capped at 5%. Restructuring spend was 0 in both this year and in prior years. Interest costs increased primarily due to the increase in interest rates during the year both due to the increase in the base rates and due, to a lesser degree, to the expansion of the facilities, following on from this year's refinancing. Moving on to Slide 8, our cash flow bridge. This slide illustrates the uses of cash over the past 6 months. Cash generated from trading activities represents GBP 19.2 million, with the GBP 20.6 million of EBITDA generated offset by an increased requirement for working capital of GBP 1.4 million, stemming from the increase in trading activities. Required cash spends covering pension scheme contributions, tax and interest represent a further GBP 8.1 million of expenditure. Drawing a line at this point before discretionary spend would have resulted in a cash generation of GBP 11.1 million and a net debt position of GBP 18.7 million or 0.5x EBITDA. However, the group went on to further invest in the development of the business by spending a further GBP 9.6 million of discretionary spend, primarily on acquisitions and capital investment. The group is often criticized for not generating cash flow. The next table tries to illustrate that, excluding discretionary and development expenditure, the group is capable of generating significant free cash flow in the years to come. The numbers on the top line represents cash flows, the equivalent of the GBP 11.1 million for the full year as laid out in our broker forecasts. And the assumption is that, even if those cash flows stay the same, once you've netted out the discretionary spend on things like acquisitions, we'll see a significant increase out to FY '26 where cash generation will probably be in the region of GBP 10.2 million. Moving on to the next slide, the earnings per share. Adjusted earnings per share increased from 2.7p last half year to 3.8p, an increase of 40.7%. It's probably worthwhile taking a step back to consider the half year's earnings performance. It's not only a record half year performance in itself but is also significantly ahead of many full year performances for the group. Certainly, the EPS is significantly ahead of pre-pandemic levels. Moving on to the next slide, our pension slide. The group's IAS 19 deficit is GBP 52.7 million, a reduction of GBP 9.5 million or 15.3% in the half year. It should be remembered that 3 years ago, at September 2020, the group pension deficit stood at GBP 15.6 million, so 219% higher than it is today. The U.K. pension deficit is GBP 36.6 million and was reduced by GBP 7.6 million during the year. The main drivers of the reduction is the 85 basis point increase in discount rates seen during the year to 5.7% for the U.K. scheme, slightly offset by 5 basis points increase in the long-term inflation estimates. Asset returns fell during the period as the value of U.K. government gilts and equities fell. The group has a natural hedge mechanism in place in its investment in life annuities covering high-value pensions, while our hedge instruments such as LDI also reduced in value. The group has in place a long-term funding arrangement with the U.K. scheme at CAR, or central asset reserve, itself a hedge on a technical provisions basis, which seeks to repay the deficit over the next 14.5 years. Cash flows under the CAR provide a long-term, predictable and sustainable funding to the U.K. scheme at around GBP 5 million level, increasing by RPI but capped at 5%. These cash flows from the CAR are not included in the IAS 19 scheme valuation. The strong relationship that the group has with the U.K. scheme and the alignment in objectives and ensuring the long-term viability of the group allowed agreement to be reached with the trustees to defer GBP 2.8 million of payments to the scheme during the pandemic, with repayments of GBP 0.6 million per annum continuing until April '27. Historically, the scheme agreed that contributions from the company would increase by GBP 1 million per annum once operating profits exceeded GBP 16 million per annum. These contributions commenced in the current financial year. The next triennial pension valuation will take place at the 31st of March '25. The last valuation showed a TP deficit of around GBP 5.9 million. It is estimated at the moment by the scheme actuary that the U.K. scheme is showing a small TP surplus at the moment. Cash contributions to overseas schemes are again predicted to be stable and are back down to normal levels of circa GBP 1.4 million, following last year's temporarily inflated figure due to the closure of the New Zealand scheme. Continuing on from last financial year's presentation, I again thought it worthwhile to show the current expected repayment profile of the U.K. and German schemes. The U.K. scheme is expected to be at 0 IAS 19 deficit midway through 2030. That's a 6-month reduction from last year-end, while the German scheme, being a non-funded scheme, will have a deficit approximately halved by the same time frame. In summary, despite large swings in the IAS 19 pension deficit, pension cash flows are manageable, predictable and sustainable over the longer term. Now I'd like to hand back over to Robert who will take you through the rest of the business.

Thank you very much. There we go, this first slide. So I thought I would start my section of the presentation by looking at the progress Renold has made over the last few years and, in particular, to see how much progress there's been from pre-pandemic levels. This slide shows that the current performance goes well beyond bounce-back. The business is developing and growing. If we start on the top left graph, you can see the growth in adjusted operating profit. To be clear, this number excludes any exceptional profit from the year. The hatched part of the bar shows the trailing 12-month value. Using that column as a guide, the adjusted operating profit is now approximately twice what it was before COVID. The bottom left graph shows return on sales, with the last point being the H1 2024 number. Operating margins have risen and are now 12%. We've not just driven increased margins from revenue growth, our intelligent pricing work streams, along with our standardization and simplification work, capital expenditure productivity and efficiency work, have also produced lower costs and boosted returns. The top right-hand graph shows sales per employee. I'm showing you this to demonstrate that we continue to drive productivity even when buying businesses that, in the short term, dilute the metric. Our investment programs continue to reduce cost and improve efficiency, but importantly, they also enhance productivity. The use of robotics and automation in our factories is growing quickly. And the bottom right graph shows that we're producing a growing return on these investments. So we just go over to the next page. Whilst Jim talked you through last year's performance of Chain and TT, I thought I would try and put this in some longer-term context. The numbers on this slide break out the divisional performance in a similar way to the previous slide for the group. The global chain performance is shown on the top section of the slide. Chain adjusted operating profit has grown by a compound rate of 11% over the last 5 years. The last 12 months' trailing adjusted operating profit is at a record level. This has been helped by acquisitions but also by our own improvement activities, as Jim showed you on the profit bridge. TT, shown on the bottom section of the page, has also hit a record 12-month trailing adjusted operating profit as we've ramped up our commercial activities and started to benefit from a number of the product initiatives and commercial contract wins. Return on sales for TT and Chain have both grown considerably since 2019. That was the last full year before COVID. I wanted to point out in particular, both divisions have an ROS of 16%, considerably above the group level of 12%. Our central costs can support a business considerably larger than today's, and so as we grow the divisions, be it organically or by acquisition, central cost growth will not be proportionate, allowing the extra trading business margin to fall to the bottom line. So even if we don't increase the divisional return on sales, and I firmly believe that we will, we will grow the group ROS simply by developing divisional revenue. Sales per employee have grown in both divisions consistently as we invest and automate. That automation is in our factories, but not only our factories, we are automating what we do in our engineering teams and elsewhere in our overhead structure, introducing new systems and processes. Our strategy of simplifying and standardizing is starting to make a material difference to our broad operational performance. We produce and sell high-specification, high-performance products. Our product management, marketing and enhanced sales capabilities are becoming better at selling the features and benefits of our products and the excellent value they offer our customers. If we go over to the next page, Tim, please, the strategy slide. This slide shows the simple 1-page representation of our STEP2 strategy. Nothing at all has changed. The growth section of the strategy is split between organic and acquisitive growth. This is all underpinned by business improvement. As you saw earlier, we've been working hard on our cost base. And in H1, we generated GBP 1.9 million of improved efficiency and productivity. I frequently get asked if there is much new opportunity to drive costs further down. And the simple answer to that is most definitely yes. There is a big list of projects which can make a material impact on our cost base. The STEP2 strategy set out 4 key objectives. Number one was organic GDP plus growth across the economic cycle. We've achieved this in the last couple of years, but as we've not yet shown, we can do this over the long term. We've marked it amber on our little scorecard here. Objective two is annual cash generation which, backing out acquisitions, we have definitely achieved. As you saw in the finance section of the presentation, we anticipate that our underlying cash generation will improve strongly over the next couple of years as known one-off or short-term cash cost wash out of the system, higher margins take effect and we continue to drive overheads down. The third objective is operating profit margin expansion. In H1, we achieved 12% ROS. And as I've just highlighted, we should see this go further as the business grows. Our objective has been to achieve double-digit margins. We're now starting to do exactly that. And so the next stage of development, we'll see us look to mid-teens which, of course, our trading businesses are already achieving. Our last objective, objective four, is EPS growth. You've seen EPS in the first half period was 3.8p, and that compares well even against previous full year numbers. We laid out the STEP2 strategy a number of years ago but still believe it's an exciting and effective way forward. We're steadily and relentlessly putting it all in place. If we flip over to Page 15. As I've been talking about our various investments, I thought I would quickly show you some of the projects completed in the recent past. The picture on the top left of this page is our very latest machining center in Westfield, our U.S. TT business. The bright yellow arm is the robot attendant that loads and unloads the machine, allowing it to run lights out even on small batch production runs. The other machinery picture showed the new laser cutter, a new extruder assembly lies in China, a new large machining center in Cardiff to cope with demand for military couplings and also the new automated pinion cell in Westfield. Pictures at the bottom show our new sites in Central India, California and Turkey, all aimed at increasing our ability to give customers a wider range of services more quickly. So if we turn over again, please. The top graphic on this slide shows the revenue and order growth by region. These numbers combine TT and Chain and they are external only. Everything is at constant exchange rates. The top line of bar charts compare the reported period against the prior year first half. Compared to last year, the group revenue as a whole was up 10.7% at constant exchange rates, whilst orders were down 15.6%. There's been more variation in performance between the regions and between sales and orders than we've previously seen. There are some big global geopolitical forces at work, but there are also a number of local drivers. Generally, we have seen some reduced demand around the world, with distributors still destocking or holding stocks low. We've seen a pickup on what we call book-and-ship business, which would suggest to me that distributors are not yet looking to expand their stock holdings but also, perversely, that they have insufficient inventory to service customers properly. Some OEMs still appear to have issues with their supply chains, which means that they draw less product from us or, in some cases, they push out their requirements. Looking at our specific geographies, we can see that India has been the most difficult region. And while some of the percentages look large, India accounts for just 3% of sales. There's been a distinct pickup in competitive activity in India, which we consider to be a short-term issue. Along with a poor season for agricultural chain, we've seen pressure on sales and orders. We still fundamentally believe in the opportunity in India and we are investing more in capital equipment, product management and sales resource so that we can capitalize on this large geographic opportunity. The Chinese performance is quite different for our 2 divisions. Chain has actually progressed well in the period, but TT has found life harder. The prime reason for this is that we've tightened our terms of business in China and consequently decided to exit some low-margin work. China remains a market with considerable opportunity for us. As Chinese industrial costs rise, mechanization and automation rates increase and higher performance products become more important, we will see our market share develop. Today, China is just 5% of external sales. Australasia has a lot of moving parts to it. The Australian business has been performing well for several years but have seen orders slow a little before considering any benefits from the Davidson acquisition. We think Australia will continue to find life a little harder as the local economy and particularly natural resource companies are less buoyant. The other territories in Australasia, namely Malaysia, Thailand, Indonesia and New Zealand, have seen a distinct tick-up in demand in recent months. The Indonesian business is, however, constrained by the local government licensing regime on imports. The businesses in the Americas, which, to Renold, are predominantly the U.S. and Canada, are seeing mixed signals. Orders have been more difficult in H1, particularly for engineered chains. And this is at least partly due to us quoting longer supply times due to some short-term manufacturing capacity limitations, which themselves are caused by high levels of demand for us. We're working to debottleneck the facility with capital and changes in working practices. Our Westfield TT business has seen similar dynamics, but as earlier investments come to fruition and output levels rise, we see opportunities growing going forward. Our European business has the benefit of a full period contribution from the YUK acquisition but also saw the downturn in economic conditions earlier than other regions. We'll wait to see whether being early in the economic cycle will now lead to leveling off and future growth. I'd just like to draw your attention to the bottom left graph. As you can see, though our order book has shortened to some degree over the last 6 months, it still remains at relatively high levels by historic standards. Turning the page once again. This slide shows the breakdown of sales by market sector. This analysis is based on our sales that don't go through third-party distribution. Over the last 2 years, the percentage of sales that go through distribution has decreased slightly to 43% of total revenue from 46%. Though in absolute terms, the sales through distribution have risen by almost 1/3. Therefore, you can tell that OEM and end-user sales have outgrown distribution. Sales to OEMs held flat at 42% of total revenue, whilst end-user sales have risen to 14%. As an added data point, broadly, we believe that MRO or maintenance is 75% of our entire business and 25% is what we call first fit. We saw absolute revenue growth in agriculture, forestry and fishing, environment, food and drink, manufactured products and transportation sectors. The manufactured products sector was the big winner. We see Western economies start to reinvest in their manufacturing base. Material handling was the main soft spot as OEM customers struggled with their supply chains. Mining and quarrying also saw a slightly reduced level of activity. It is still very much my belief that reshoring and derisking of supply chains is a top priority for many industrial groups, and we remain optimistic that we're well placed to benefit from these trends with our wide geographic supply and manufacturing base. Our customer and sector diversity remains a core strength of the Renold business. I've included some pictures of a small selection of industries that use our products to remind people the breadth of the applications and end markets. Our products are used very extensively, and you will all come into contact on a daily basis with products and services that use our products, maybe the food you eat, the things you buy, the transport you use or indeed your leisure activities. Our products are a key component of delivering your lifestyle without you even knowing it. Automation to reduce costs and to mitigate labor shortages is an important driver of our product demand. The need for suppliers to be sustainable and ethical has never been higher. This all plays to Renold's strengths. We have a diversified manufacturing footprint to derisk our own and customer supply chains. We produce a high-specification, long-life, low-energy, sustainable product, the use of which is increased by the trend for automation. Global market trends are a tailwind for the Renold business. If we go over to the next page, Page 18, a few words about acquisitions. In September, we completed the acquisition of Davidson Chain in Australia for AUD 6 million. This is a small but very nice addition to our business. As was the case with our YUK acquisition last year, the two brothers who've been running the business at Davidson are joining Renold and bring a wealth of industry knowledge along with their wider team. The business adds some weight to our core Australian conveyor chain business but, in particular, gives us an enlarged adapted transmission chain business. The Davidson's business has traditionally operated in a similar fashion to the Renold service centers that we are establishing in key markets. Therefore, the Davidson acquisition will jump-start this initiative in Australia. The business turned over AUD 4.2 million and was generating EBITDA of AUD 1.1 million when we acquired it. The deal enhances earnings from day 1. We paid an EBITDA-to-enterprise value multiple of 5.9x for the business, but after hard synergies, this is expected to fall to 5x. There are a number of hard savings which we are already working on. These include cost reductions and in-sourcing some of their previously outsourced purchases. On top of this, there are a number of soft synergies, which are predominantly commercial and which we will garner over time. Renold net debt at the end of H1 was GBP 28.3 million despite the acquisition of Davidson. This is a leverage ratio of just 0.7x EBITDA and, therefore, leads room for us to make more sensible, conservative bolt-on deals that will continue to enhance the value of the group. We have a good pipeline of opportunities, which we are constantly working on. We have a conservative approach to acquisitions and, as evidence of this, have not pursued some what we would consider highly priced deals over the summer. The acquisition of chain businesses that meet our criteria are conservatively financed and carefully integrated, therefore, are a source of value creation for Renold as I think we are demonstrating. We turn on to our last slide. We're pleased with our first half record results, and I hope you can clearly see that we produced a comprehensive step-up in performance. Sales, profits, return on sales, EPS and cash generation have all moved forward markedly. We comfortably produced double-digit ROS. And net debt, despite the Davidson acquisition and other first half cash costs, is still just 0.7x EBITDA. The group's robust performance during the period has delivered broad-based record results, reflecting the benefits of the strategic program implemented in recent years. The YUK acquisition from last year is operating well and providing us with the many benefits we expected. The Davidson acquisition will bolster our Australian business going forward. We recognize there are still considerable economic challenges in many parts of the world. Supply chain issues, although reducing in number and severity, are still prevalent in some places. And with some customers, inflation and prices remain high, particularly for labor. Once again, our employees around the world have responded magnificently to the challenges we have faced. With their help and the strength and performance of the business, we look forward to the remainder of this financial year with optimism. There remains uncertainty over the implication of global economic pressures in the medium term. However, the Board is increasingly confident in delivering our results for the current year ahead of previous expectations. Thank you very much for your attention. And I think it's back to Tim to chair us through some questions.

[Operator Instructions] The first question I think you've addressed in quite some detail, Rob, and to a lesser extent, Jim, regarding margins. The question that was asked, how sustainable are these higher margins? You talked about central costs as the business grows, but are there any headwinds that cause concern on that margin?

I mean there are always headwinds. I mean in terms of the cost side, we have two big costs. They're steel and people. Steel costs broadly are flat. In some regions, it's going up a little bit. In some places, it's going down a little bit. But it's broadly flat, and we don't see that changing markedly certainly for the rest of this year and maybe for longer than that. Labor costs are still rising. Some countries' labor costs are going up more than others. Our policies are very clear. We will continue to pass those cost increases on to our customers if we cannot mitigate them in some way. We are mitigating some of them through our cost reduction activities, investments, et cetera. But at the end of the day, we do make this high-performing, high-specification product, which offers good value to our customers. And therefore, we do ask customers to pay the appropriate price. That's a long way of saying that we think that our margins are built on firm foundations. Over time, we see our margins going up rather than going down. I'm not saying they're going to continue to grow at the rate they did in the first half of the year, but we do see ability to move them up over time. And we talked about how that might work with the scale of the business growing as well. Will there be some lumps and bumps along the way? I'm sure there will. There always are. But the direction of travel for us is upwards, and our objective is to move towards mid-teens.

Thank you. A question on the balance sheet and particularly inventory levels. A question was asked, inventory level is pretty much similar to the market cap, can you talk about the inventory that you maintain and how that's important to the operation of the business?

Shall I tackle that, Jim, at least to start with? Jim will give an accountant's view on it, and an accountant's views are always you've got too much inventory. It seems to be the common stance. We operate in 20 countries. We hold stock in a lot of places. We have factories that are not all the same, and therefore, we ship product around the world. We make what is actually a more complex product than people think we do. If you actually look at our inventory, finished goods is a good proportion of it, but it's not the biggest part of it. It's in materials, WIP and finished goods. And goods in transits, as in things that are actually in containers going around the world, are a reasonable percentage of it as well. Depending on what products we're talking about, so this is more about why I class this standard products, so these are things that we sell off the shelf. These are high-service items. If you don't have it, you don't sell it. People will not wait for some of those products, depending exactly on what it is. The other thing I'd say, chain, which is maybe a little bit different to some other products, want a 1,000 meters of chain, there is no point having 999 meters on the shelf because people need 1,000 meters. So you need to have 1,000 meters or whatever the right quantity is, which also means you gravitate towards higher levels of inventory. It's a key aspect of the business. We have shown repeatedly that if we cut, indiscriminately anyway, inventory levels, it has an impact on sales. We need to have the right stock, the right service levels, and that is a key feature of the business. Our service centers that we're developing, that we've talked about in places like Turkey and the West Coast of the U.S., will hold inventory, so they will increase the inventory holdings we have. For me, it's not so much about the absolute value of inventory. It's about the return I get on that inventory and whether I'm making a decent return on it. That, I think, is the key metric, and we think we do increasingly make a good return on the inventory. I don't know if Jim has a few words.

I'd like to add one or two further points. The first point is that we do look at our competitors and where they are with their inventory holdings. We're assessing acquisitions all the time. And one thing that broadly you see in this industry compared to some other industries is that it is very, very important to have that stock in the right location at the right time. And certainly, some of our stock holding in terms of days is actually quite significantly lower than some of our competitors. And that just shows possibly the fact that we actually are smarter in the way that we hold inventory than a lot of the other guys out there who are selling chain as it were. So that's an important point. We do help hold a lot of inventory, but it has to be there for customer service and it has to be there at the right time. And the key to this, as I said, is we're probably a lot better holding the amount of inventory to hold than a lot of the other guys in the market.

Well, Jim, that neatly brings me on to the next question, which is, could you just give a little bit more color, either you or Robert, on the competitive position of Renold? What does the global industrial train market look like? What sort of market share does Renold have?

Okay. the industrial chain market is a multibillion-pound market. You can go and buy reports on it. I have to say I haven't yet come across one that I would think is close to being right. We can look at the things, the data points we actually know for a fact, compare that with what's in these reports, and therefore, you've got a question to some of the answers they come out with. Industrial chain market is multibillion pound. Is it GBP 2 billion? Is it GBP 3 billion? Is it GBP 4 billion? It's a good debate. We believe we have something like 7% global market share. We think we are the second largest in the world in industrial chains. It is, therefore, a highly fragmented business as far as competition is concerned. Tsubaki in Japan, we think, is number one. Industrial chain, just to be clear, we exclude automotive chains, so on-car automotive chain. We exclude motorcycle chain. We exclude bicycle chain. These are all very large markets. We today don't operate in those markets, but those are all multibillion-pound markets as well. It excludes what we call tabletop chain as well and certain subsectors, things like bi-planar chain. So it's a big market. It's a fragmented market. It's a global market. There are a lot of applications, a lot of markets, as I keep saying and I tried to explain in the presentation again, chain, in particular, is everywhere. You will be stunned where it is and it impacts on everybody on a regular basis. The market consists of make-to-order product and it consists of sort of standard chain that we make in store and sell off the shelf. That makes it sound as if standard means commodity standard. It does not mean commodity. Chain is not a commodity. It's anything but. But if you take sort of a standard half-inch, British standard chain that meets the ISO specification, in terms of dimensions and performance, we sell 4 different tiers of chain of that particular dimension at 4 different price points. And on top of that, we have what we call solution chains, which are chains that do particular things. They operate in high temperatures or low temperatures or abrasive environments or underwater or without lubricant and so on. So it's really quite a fragmented, specialist, highly engineered product. Renold is a premium, high-specification supplier. Renold is the name in the chain market. Hans Renold invented to roller chain in Manchester about 150 years ago. We've got a name for producing a very high-quality, high-performance product. Our engineering is respected across the world. And if people have particularly difficult applications, then they will come to us. Just a matter of interest, chain could last for 10 years or it could last for 10 weeks in an application just depending on what it is. A large chain order might be a single chain for GBP 4 million or $4 million, or it might be GBP 50 for a box of chain. There is a huge variety. It is a very complex business. And we are well positioned in that market, and we think increasingly well positioned, as the market moves towards more sophisticated higher performance products, as we keep saying, driven by some of the tailwinds there are like automation.

I'll add one further point to that. Robert did touch on it there. When we say industrial chain, we do not operate it and we're not exposed to those business sectors which will structurally change as things go forward. So automotive chains, et cetera, as the market moves to electric cars, there will be a chain that's taken out of the designs. And some of our competitors will see fairly significant restructuring activities necessary as those markets are shrinking and declining. The same with the motorcycle chain. We're not really exposed to those. So in the years to come, as we grow our markets and we grow our activities, we won't have to tackle those same restructuring actions that some of our other competitors around the world will have to face.

Okay. Thank you. And presumably, that fragmented nature of the market means that there is plenty of potential acquisition opportunities. And you talked about acquisitions. A question that was asked, can you just give a little bit more color on your acquisition criteria and the sort of level of debt that you would be comfortable to cover any potential acquisitions?